How do we know? Because we just tried it. In February, faced with a mortgage crisis and a housing bust, our leaders in Washington agreed on a $168 billion package, consisting mostly of $1,200-per-family rebate checks that went out in the spring. Today, it's clear that expensive palliative solved nothing.The editors then offer analysis, purportedly their own.
Harvard's Martin Feldstein, the head of the National Bureau of Economic Research, was one of the many economists who urged this sort of program last winter. But in a recent article in The Wall Street Journal, he announced that he was wrong.
The idea was to put money into the pockets of consumers, who would spend it, providing a needed infusion to companies that make and sell goods and services. But Feldstein says it didn't work. "Recent government statistics show that only between 10 percent and 20 percent of the rebate dollars were spent," he wrote. "The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending."
That's not really surprising. When workers get a wage or salary increase, they spend more than before because they know they can afford it. But when people get a modest one-time windfall, they usually put most of it in the bank or use it to pay off debts.That analysis, however, is not original. It's the permanent income hypothesis (more technical exposition here) that figures prominently in Milton Friedman's Nobel credentials.
And hence, it gives me an opportunity to weigh in on the controversy over the University of Chicago's proposed Milton Friedman Institute, which draws opposition based on perceived inequities in departmental funding and perceived support for oppressive Third World governments.
I suppose a workshop on "Empirical Support for the Permanent Income Hypothesis" at the institute would dismay the opponents of the center, for not paying sufficient attention to those grievances.
After the last year of protests, meetings and mud slinging over the under funding of graduate students in the Humanities and Social Sciences, we were all rather dismayed to discover that although the good ol’ powers that be can’t afford to give us health care, they can afford to build a whopping great big new centre for the economists. Because those guys are in such a precarious position they need a little extra cash.
Aside from being pissed off at the unfairness of it, though, there are some more fundamental objections to the new centre. There are other departments at the UoC that have great reputations, but all of us carry this collective milestone round our neck that threatens to disrupt and discredit us at any moment: the reputation of the Chicago School of Economics. That the new centre will be actively continuing the work, as well as baring the name, of Milton Friedman has been a bit of a kick in the teeth.
The center also draws opposition based on perceived influence-selling.
Friedman, of course, was one of the twentieth century's most influential and controversial economists, an extoller of free market power and a hater of governmental regulation. Fittingly, the university plans to underwrite the institute's cost with donations from the private sphere; perhaps less fittingly, those who contribute more than one million dollars will have the right to participate in the institute's academic deliberations.As another aside, I've never understood this "hater of governmental regulation" line of argument. Pointing out the inefficiencies of excessively precise attempts to regulate, such as the certificates of public convenience and necessity that midwived empty trucks running in opposite directions on the same road does not generalize to abolishing the right-of-way rules for roads. And although Professor Friedman did mention transport and telecommunication regulation in Free to Choose, we're really talking about the work of Ronald Coase and Richard Epstein and Sam Peltzman more than that of Milton Friedman when we get into unanticipated and unintended consequences of such regulation.
There are further reactions to the objections to the proposal at the Semi-Daily Journal, and two roundups at Truth on the Market. Ilya Somin of Volokh Conspiracy observes,
I teach at the George Mason University School of Law. That doesn't lead anyone to assume that I or the university as a whole endorse Mason's opposition to the Constitution or his other political views. Everyone understands that the university is named after Mason to honor his achievements, not to express agreement with his opinions.There is a crucial distinction here: presumably one does not have to place special emphasis on George Mason's objections to the Constitution in a constitutional law class. A macroeconomics working group at the Milton Friedman Institute, on the other hand, would be remiss not to consider the permanent income hypothesis or A Monetary History of the United States. By the same token, it would be remiss not to consider possible repercussions from big-bang privatizations, whether of Chilean public pensions or of Soviet steel firms.
There are further reactions to the debate at The Torch and University Diaries and from Sherman Dorn, who notes,
I'm sympathetic to arguments that those "alternatives to recent economic, social, and political developments" are the default position in much of the rest of the academy, despite their empty empirical content, although it is not my intent to refight the culture wars tonight.
The faculty point out that the investment of $200 million in this new entity will privilege a certain view of markets associated with Friedman, a point that seems to be without too much controversy. But they talk about it in terms of "the interests of equity and balance" and ask the university "to provide roughly equivalent resources for critical scholarly work that seeks out alternatives to recent economic, social, and political developments."
The point could be sharpened by talking about the academic losses involved in the massive investment in a single perspective: Isn't behavioral economics one of the most exciting fields in economics and one that will be entirely ignored by the Milton Friedman Institute? To put the issue in standard neoclassical language, the opportunity cost of building the Milton Friedman Institute is the investment not going into building up the university's economics research in other areas, including behavioral economics, public economics, and so forth. To me, it seems like a deliberate institutional risk to put so much of one's resources into a single academic approach to any field.
On the other hand, to suggest that a Milton Friedman Institute would offer no research opportunities for behavioral or public economics is to demonstrate only a superficial understanding of Milton Friedman's, or Chicago's, economic thinking.